This article appeared in the January 2011 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.
By Mark Pachacz, Bioshares
After 10 years of investment and setbacks, Australia's biotechnology sector is finally enjoying commercial success. In an investment cycle that started in 1999, more than $5 billion has been invested into local biotech companies.
That investment is now generating a lucrative return to shareholders as these biotech products finally reach the market. The successful companies have negotiated the complicated and lengthy regulatory and commercial pathways, and those same challenges are now obstacles for competitors.
The two years 2008 and 2009 were a disastrous period for biotech investors. There were seven consecutive quarters of sharemarket declines as measured by the Bioshares Index. However, this declining sharemarket trend was in complete detachment from the underlying progress the sector was making.
2009 proved to be the start of a turnaround for biotech companies, helped by two $300-million-plus acquisitions: of skin cancer treatment Peplin and biologics group Arana Therapeutics. Over the year, the Bioshares Index skyrocketed by 102 per cent.
In the past, a resurgence in biotech companies had never been sustained and the expectation by many was that the positive sentiment to biotechs would be short-lived.
That was certainly how 2010 began, with a string of setbacks in some of the leading companies. Biota Holdings' share price plummeted as pandemic flu threats abated; Chemgenex hit a roadblock with the US Food and Drug Administration (FDA); Pharmaxis delivered some ambiguous results in final clinical trial for cystic fibrosis; and Avexa announced it would be cancelling its lead HIV program.
A defining year
But 2010 turned out to be a defining period for the Australian biotech sector.
In March, Acrux (ASX Code: ACR) signed the largest deal for an Australian biotech, with pharmaceutical giant Eli Lilly. The deal gave Eli Lilly global rights to a transdermal testosterone product, called Axiron. Acrux received a US$50-million upfront payment, with a further US$285 million in potential milestone payments and a healthy royalty rate, estimated at around 20 per cent of sales.
The current global market for testosterone products is valued at $1.2 billion a year. Only about 5-10 per cent of men in the US with low testosterone currently take testosterone medication, making it a largely untapped market. That the Axiron product has clear delivery advantages to all its competitors, and the size of the market, stimulated a bidding war from potential partners to gain access to the device.
Axiron is now approved in the US and is expected to reach the market in early 2011. Acrux has announced it will pay a dividend to shareholders in February 2011, close to 60 cents a share, after receiving a further US$88 million in milestone payments from Eli Lilly.
More good news for biotech investors came in December 2010. Adult stem cell company Mesoblast (MSB) announced a deal with a mid-size pharmaceutical company, Cephalon that eclipsed the Acrux deal.
Cephalon will make a US$350-million investment in Mesoblast, made up of a US$130-million upfront licensing payment and a US$220-million equity investment, for global rights to a number of the applications of the technology.
These applications include use of the stem cell technology in bone marrow transplantation, in heart disease and also in the potential treatment of Parkinson's and Alzheimer's diseases. Mesoblast will maintain manufacturing control and rights for a number of other uses, including in orthopaedics for regeneration of bone or cartilage. Mesoblast will also enjoy an undisclosed 'significant' share of product sales.
Biotech investors are now finally enjoying the success that had only been talked about previously as blue-sky potential.
What to expect in 2011
The year ahead should see a continuation of product registrations, product approvals and product launches. Here are nine biotech companies to watch in 2011:
(Editor's note: biotech shares typically have a higher risk-and-reward profile than most other sectors. Those companies without cash flow should be considered speculative. Do further research or talk to your financial adviser before acting on the following ideas.)
One of the country's leading biotechs, Pharmaxis, (PSX) looks to be back on track, with the committee advising the Australian drug regulator, the Australian Advisory Committee for Prescription Medicines, recommending the company's leading cystic fibrosis drug candidate be approved. European approval is expected if all goes well with the product launch by mid-2011.
Oncology company Chemgenex Pharmaceuticals (CXS) is also on track again with the FDA. The company is expected to resubmit its new drug application in the first half of 2011 for Omapro, for the treatment of chronic myeloid leukaemia.
Bionomics (BNO) should have a very active first half in 2011, with results due from the company's two lead drug candidates: one is a new cancer treatment that breaks up tumour blood vessels, the other an improved anti-anxiety compound that potentially offers an improved drug profile to drugs such as Valium and Prozac. The company's major shareholder has also opened a tender process for the potential sale of the company.
Starpharma (SPL) is expected to start generating royalty revenue form its microbicide that will be incorporated into the Durex brand of condoms throughout the world.
Alchemia (ACL) should also start to see significant revenue from its generic blood thinning drug, fondaparinux, which should reach the market early in 2011.
Clinuvel Pharmaceuticals (CUV) had its drug cleared for use in Italy in 2010, and in the second half of 2011 it expects to file the compound for wider approval in Europe. Its drug increases the melanin density of the skin, providing protection from sunlight to people with a severe sun-intolerance disorder.
QrxPharma (QRX) is expecting final results from its Phase III trial of its novel pain therapeutic combination of morphine and oxycodone. The product is expected to be filed for approval around mid-2011. Mayne Pharma (formerly Halcygen Pharmaceuticals) has just filed its new improved generic version of an antifungal drug, called SUBACAP, with European regulators. The company is expecting a decision by the end of 2011.
Tissue Therapies' (TIS) share price has been moving firmly as the company progresses partnership discussions for its unique wound-healing treatment, called VitroGro. The treatment is expected to gain regulatory approval by mid-2011.
Biota Holdings (BTA) may be a turnaround stock in 2011 if its new flu drug, Inavir, can get some early traction during the current Japanese flu season.
Once the technology aspects of companies in the life science industry have been de-risked, it attracts buyers in the form of large pharmaceutical or medical device groups which have the distribution channels in place to begin selling these products.
Companies that Bioshares believes may be acquisition targets in 2011 include Chemgenex Pharmaceuticals, Tissue Therapies, diagnostic group Universal Biosensors, and Bionomics.
About the author
Mark Pachacz is co-editor of Bioshares, a specialist newsletter on the biotech sector.
The Biotechnology section on the ASX website provides useful information on investing in biotech shares. It also has research, news and education on the benefits and risks of investing in biotech shares.
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